What has happened to the annuity market post-pension freedoms?

The then chancellor George Osborne’s budget speech back in March 2014 gave investors more responsibility when he revealed they would not have to hand their pension pot to an annuity provider at retirement age but could opt for income drawdown instead.

In the immediate aftermath share prices of some of the UK’s biggest annuity providers, such as Legal & General and Aviva, tumbled by as much as 8 per cent as it became clear those reaching retirement would no longer have to buy an annuity to fund the final decades of their life.

In short, the annuity market has gone from annual sales of around £11bn in the UK to around £4bn today.

The decline was anticipated by many in the industry so while the latest annuity sales data is stark, it is not entirely surprising.

Down but not out

Fiona Tait, pensions specialist at Royal London, quotes figures from the Association of British Insurers (ABI) which shows annuity sales have declined by around 80 per cent since the announcement of pension freedoms in 2014, and have remained around that level. 

Overall, annuities have been vilified by the media and politicians and as a consequence the public has fallen hugely out of favour with the idea of buying an annuity. Andrew Pennie

She points out how the sales figures compare with 74,092 annuities sold in the quarter immediately before the announcement of pension freedoms, down to 18,243 sales in the quarter immediately after they came into force (the second quarter of 2015). 

The latest sales figures - 20,803 in the third quarter of 2016 - are still only at 22 per cent of the pre-freedom levels. 

Source: Iress Retirement Report

Andrew Simon, executive general manager, product at Iress, explains: “The pension freedoms were designed to give individuals greater control over how they use their fund to meet their specific retirement needs.

“A key aspect of this increased control is being able to access the fund largely as the individual wishes, subject to a few restrictions. For some this means taking some, or all, of the fund as a cash withdrawal.”

He continues: “For many, the pension freedoms simply mean no longer having to purchase an annuity with other, more flexible options appearing more attractive in comparison. 

“These options include guaranteed products such as unit linked guarantees, where income is guaranteed but not the capital, or guaranteed drawdown, a combination of annuity and drawdown, equity release or fixed-term annuities. This shift started as soon as the pension freedoms were announced.”

Falling rates

There is more to the decline of annuity sales than the pension freedoms though, as Andrew Pennie, head of pathways at Intelligent Pensions points out.

“Overall, annuities have been vilified by the media and politicians and as a consequence the public has fallen hugely out of favour with the idea of buying an annuity,” he suggests.

Annuity rates have also fallen, making them less attractive for those preparing to live for another 20-30 years in retirement. 

The Iress Retirement Report reveals the highest average annuity rate of the past three years was 5.88 per cent and the lowest 3.74 per cent.

A series of economic events has combined since 2014 to drive down the rates on offer.

Providers have tried to replace the lost business through corporate bulk annuity sales but there has been some fall out in the market. Andrew Pennie

He explains: “Since pension freedoms, annuity rates have been in decline, with the UK’s Brexit decision putting further downward pressure on interest rates, gilt yields and hence annuity rates.”

Ultimately, the drop off in sales of annuity products over the past nearly two years has forced several providers to exit the market altogether, with Prudential the latest to announce it is doing so.

“Providers have tried to replace the lost business through corporate bulk annuity sales but there has been some fall out in the market,” says Mr Pennie. 

“Standard Life and Prudential are two of the big names to stop offering annuities and LV= have also withdrawn. Legal & General have reviewed their continued participation and limited their offering. In addition, two of the largest specialist annuity providers, Just and Partnership, have had to merge in recent months.”

Prudential has launched an annuity comparison service for existing pension customers which it confirms will be “phased in” during 2017.

In a statement, the firm explains: “In addition to cash and income drawdown options that we provide to customers, this new service will facilitate direct access for Prudential customers to a wider range of annuity providers, while extending the choice available to them if choosing to secure all or part of their retirement income through an annuity.

“The Prudential annuity panel at launch comprises Aviva, Just Retirement, L&G and Retirement Advantage.”

A Prudential spokesperson adds: “We have made this decision due to regulatory and other changes in the retirement market. In launching this service, we still want to ensure  our customers who choose to annuitise are aware of their options and the new service will give them access to a limited panel of annuity providers from across the market.”

Secondary market?

Shortly after Mr Osborne’s pensions shake-up the government proposed to create a secondary annuity market.

The government’s plan was to launch this market in April 2017 but the idea was eventually scrapped entirely in October last year.

Had it gone ahead, it would have meant annuity holders could have cashed in their annuity with their provider.

On the Just website, it states: “However, after discussing this with pension providers, industry regulators and consumer groups, the government felt there would not be enough companies willing to purchase annuities to create a competitive market. Simply put, it seemed unlikely that there was enough competition in the market for customers wanting to sell their annuities.

“This meant they could not guarantee customers would get good value for money, and as a result were concerned that customers could be at risk.”

The fact annuity purchases have remained at a certain level suggests there is still a need for these types of retirement income products, particularly as at the same time average life expectancy has gone up.

The Iress Retirement Report reveals the number of Britons reaching the age of 100 has quadrupled in the last 30 years, according to the Office for National Statistics.

Mr Pennie notes: “There hasn’t been much good news for annuities since the launch of pension freedoms but they remain the most effective vehicle for secure lifetime income and therefore still have an active part to play in the retirement income landscape.”

eleanor.duncan@ft.com